Trefis Helps You Understand How a Company's Products Impact Its Stock Price


Western Digital announced earnings on Tuesday, reporting a 2% year-on-year decline in net revenues to $3.88 billion. The company reported a 3% y-o-y decline in the number of units shipped to 61 million units during the quarter. Our earnings note discusses these results in more detail.

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During Q4, American's fuel expense fell by about 20% - or $534 million - year-over-year, lifting its profit. This enabled American to complete a very successful first year of its merger with US Airways. With oil production rising from the U.S. and OPEC not resorting to production cuts, the supply glut in the oil market is likely to persist for the foreseeable future, maintaining pressure on crude oil prices.

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Wal-Mart And China: A Story Of Missing Customer Trust
  • By , 1/29/15
  • tags: WMT TGT COST
  • AOL Logo
    As AOL Looks To Shut Down Websites, It Should Invest In Ad Platform And Content
  • By , 1/29/15
  • tags: AOL YHOO GOOG
  • In its efforts to improve profitability, AOL (NYSE:AOL) is considering shuttering some of its websites, according to a person with knowledge of the matter (reported on, as it looks to restructure its business. AOL has been selectively selling its non-profitable products so that it can focus on improving its ad tech platform, core content verticals and offer new products for these profitable services. We think that selling these non-profitable websites is a step in the right direction as users currently throng to premium content websites such as Huffington Post, Engadget etc. However, the industry is highly competitive with a number of players and AOL has not been able to monetize its properties, which has resulted in it developing an Ad-tech platform. The company has been aggressively targeting programmatic advertisement. This restructuring is important as AOL can now free up some cash to plough back the money into its newly launched Ad-tech platform  and developing content for its existing premium platforms. In this note, we explore why the company needs to pursue this strategy. See our complete analysis for AOL here AD-Tech Platform To Boost Revenues In the last few years, online ads technology has undergone a rapid transition, largely due to technological and cultural shifts.  There have been innovations in how ad slots are bought and a proliferation of new contexts in which ads are viewed, including smartphones, tablets, online videos and social networking sites. With this profusion has arisen a degree of chaos in online advertising, which has created complexities for brand managers, agencies and publishers who are required to sort through the sprawl of available choices. According to eMarketer, advertisers’ spending on programmatic platforms will increase to $8.36 billion this year in the U.S. alone. It projects that overall spending in programmatic will increase to $20 billion by 2016. We think AOL is well-positioned to capture a bigger portion of programmatic spending in the future by leveraging its demand side platform (DSP) and supply side platform (SSP) for both video and static display ads. While AOL doesn’t disclose the breakup of its revenues from its RTB platform, if AOL were to capture 10% of this spending in the U.S., its display ads revenue from third-party could double by 2016. According to our estimates, the third-party display ads division constitutes over 41% of AOL’s value. In the third quarter, revenues from third-party display ads continued to generate strong growth. Revenues from this division grew by 44% to $215 million, driven by growth in the sale of ads across AOL’s programmatic platform and by the inclusion of revenue from Third-party network revenue grew 23%, excluding AOL is aggressively developing its programmatic ads platform to sell more ads on third-party sites. Furthermore, the company’s platform is focusing on delivering ads not only across different platforms (such as tablets, mobile devices and desktops) but also across different formats (i.e., videos, contextual search, etc.)  As a result, the cross–screen campaigns have allowed the company to report substantial growth in the number of ads sold through the programmatic platform.  It also generated an increase in revenue per page view. We believe that a strong programmatic platform will be a key driver in boosting AOL’s revenues by closely matching an advertiser’s ads with relevant content inventory. RTB (real-time bidding) aggregates the impression slots offered across multiple ad networks and matches them (based on the advertisers target, budget and placement requirements) with the most appropriate ads. Furthermore, with cross screen platforms, ads served through programmatic platforms are shown over mobile devices, desktops and tablets. With relevant ads displayed across content, AOL can continue to charge higher revenue per page view (RPM) to advertisers. Currently, we expect revenue per page view to grow from $5.21 to $7 by the end of our forecast period. Why AOL Needs To Invest In Content According to our estimates, AOL currently derives 28% of its value from display advertising, revenues for which are primarily dependent on the number of pageviews across its platforms. A strong content offering which promotes user engagement, can drive page views across AOL sites and drive revenue growth at AOL. We believe that AOL must invest in its existing properties to increase user engagement so that it can challenge competing websites such as  Facebook (NASDAQ:FB),  Google (NASDAQ:GOOG) and  Yahoo! (NASDAQ:YHOO). In the past, the company not only was among the top 3 players in content videos and video viewers’ category but also served over 5 billion video ads. This improvement in video offerings translated into overall growth in the number of unique visitors across AOL properties, which grew to 200 million with almost 50% of traffic (110 million users) being mobile. Going ahead, if  AOL can increase its user base by offering better and engaging user content across more geographies, it can further increase its unique visitor count and pageviews. We currently have a  $41.97 price estimate for AOL, which is approximately 13% below the current market price. Understand How a Company’s Products Impact its Stock Price at Trefis View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    Little Respite For American Eagle In The Holiday Season
  • By , 1/29/15
  • tags: AEO ARO ANF GES
  • American Eagle Outfitters (NYSE:AEO) released its holiday sales results earlier this month, reporting 1% increase in its revenues for the two month period of November and December. However, the company’s consolidated comparable store sales including e-commerce were down 2% from the year ago period. Although American Eagle’s holiday performance was significantly better than its peer Aeropostale (NYSE:ARO), the Pittsburgh based specialty apparel retailer is headed into its eight consecutive quarter of comparable sales decline. Fierce competition in the market, weakness in the online space, and a slow response to changing consumer tastes are some of the factors that have troubled the company. Our price estimate for American Eagle Outfitters stands at $13.45, implying a discount of more than 5% to the current market price.
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    Activision Blizzard To Retain Dominance In FPS Domain
  • By , 1/29/15
  • tags: ATVI EA MSFT GME
  • The gaming industry managed to surpass last year’s performance, with overwhelming demand for hardware sales. In this scenario, top video game developers focused more on releasing their highly popular titles just before the holiday quarter, which accounts for almost 40% of the annual sales. According to the NPD report for the month of December, the industry generated $3.25 billion in the last calendar month, down from $3.28 billion in December 2013. However, the highlight of the last year was the strong demand for consoles during the entire year that managed to overshadow the lagging software sales. In December, gamers spent $1.31 billion on hardware, down nearly 4% year-over-year (y-o-y). However, the trend continued in the software segment, as the net software sales for December 2014 reached $1.25 billion, down 2% year-over-year. For the entire calendar year of 2014, gamers spent roughly $5.1 billion on physical hardware for video games, up more than 18% y-o-y, offsetting software sales, which were nearly $5.3 billion, down 13% y-o-y. As a result, the total revenue for the industry in the U.S. was up 1% y-o-y. This indicates the strong demand for the new console generations: Microsoft’s Xbox One and Sony’s PlayStation 4. The first-person shooter (FPS) genre is becoming more and more popular, and Activision Blizzard (NASDAQ: ATVI) has dominated the FPS domain for the last 5 years, primarily driven by the  Call of Duty franchise. The company is about to release its annual report for the fiscal 2014 in the first week of February, which will give us a clear idea about the performance of the company’s core titles. Activision went into the holiday period with two new and highly awaited titles: Call of Duty: Advanced Warfare and Destiny. Our $21  price estimate for Activision Blizzard’s stock is roughly the same as the current market price. See our complete analysis of Activision’s stock here Call of Duty Led The Holiday Quarter Call of Duty (COD) is a first-person and third-person shooter franchise, with over 10 titles for the consoles, handhelds, and PC, over the last decade. It is one of the best western interactive franchises with over $9 billion of life-to-date revenues and around 150 million units sold to date, as well as accounting for 56% of the total shooter game sales in 2013. In the first half of 2014, Call of Duty: Ghost led the FPS charts with impressive sales figures on next generation consoles -  Microsoft (NASDAQ:MSFT) Xbox One and Sony PlayStation 4. However, the company released its new title  Call of Duty Advanced Warfare on November 4. Being the most awaited game of the year, it was off to a great start. Call of Duty: Advanced Warfare sold nearly 7.2 million units on all the major platforms in the first week of its release. As of January 3, the title has sold approximately 17.6 million units, leading in the FPS genre. Moreover, the Call of Duty online community is one of the biggest online platforms in the world and its users are increasing day by day. Already a dominant force in the FPS genre, Activision aims at strengthening its hold over the segment, as Electronic Arts is rapidly climbing up the ladders in this segment with its  Titanfall & Battlefield franchises stealing market share from Activision’s  Call of Duty . Trefis charts below show our forecasts for the company’s title sales for the two major gaming platforms. Can Destiny Be The Next Big FPS Franchise? In September, Activision released a new FPS franchise: Destiny, which is an online FPS game based on a post apocalyptic science fiction theme in a persistent online world. In the gaming world, persistent world refers to a virtual world that continues to exist even after the user is offline and the changes made by the user can be saved. This innovation, generally used in Massively Multiplayer Online Role-Playing Games (MMORPGs), has recently gained popularity among gamers. On September 10, Activision reported that nearly $500 million of the game products have been shipped to retail and third-party stores in just 24 hours, making  Destiny the most successful new video game franchise launch of all-time. Destiny sold nearly 10 million units as of January 3, 2015,  of which 4.44 units were sold in the first week of its release.  Considering it is a new franchise and that it was the 6 th highest  title sold globally in 2014, Destiny might just be the next big FPS franchise in the gaming world. With an altogether different storyline, excellent graphics, and new features, the demand for the title is still strong. Activision has always surprised its gamer base with additive features to its most popular games, and they have been well received by the gaming community. In short, Activision is ensuring that it maintains its dominance in the FPS genre, with new and far more addictive titles. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    U.S. Steel's Cost Reduction Initiatives And Improved Market Conditions Boost Q4 Results
  • By , 1/29/15
  • tags: X MT VALE RIO CLF
  • U.S. Steel (NYSE:X) released its fourth quarter results on January 27 and conducted a conference call with analysts the next day. The company’s income from operations rose sharply to $420 million in Q4 2014, from $146 million in the corresponding period in 2013. The improvement in U.S. Steel’s results was driven by ‘The Carnegie Way’ initiative, an ongoing company-wide endeavor to reduce operating costs and increase the efficiency of its operations. In addition, improved market conditions for steel in the U.S. boosted the company’s results, partially offset by higher maintenance costs and lower production levels as a result of scheduled maintenance activity. See our complete analysis for U.S. Steel The Carnegie Way With a subdued demand and pricing environment for steel prevailing in 2013, the company had launched an initiative known as ‘The Carnegie Way,’ which is focused on cost reductions and improvements in operational efficiency. The company provided some details about the break-up of areas where The Carnegie Way benefits have been realized. Improvements in manufacturing processes, supply chain, and logistics, as well as reductions in selling, general, and administrative expenses, are the main areas where the benefits of initiatives undertaken under The Carnegie Way have been realized. Projects undertaken under this translated into an improvement in margins to the tune of $575 million in 2014. In addition, the company estimates that additional benefits of around $150 million will be realized through The Carnegie Way initiative in 2015. Thus, The Carnegie Way will continue to positively impact the company’s results this year as well. Operational Performance Steel shipments for the Flat-rolled Steel segment stood at 3.02 million tons in Q4 2014, as compared to 3.47 million tons in the corresponding period of 2013. This was primarily because of the deconsolidation of the results of U.S. Steel Canada in Q3, after U.S. Steel’s Canadian unit filed for bankruptcy protection. The average realized price for the division rose 2.4% year-over-year to $775 per ton in Q4. This was expected, given the improved demand and pricing  environment for steel in the U.S., as compared to the corresponding period a year ago. The Manufacturing Purchasing Managers Index (PMI) measures business conditions in the manufacturing sector of the concerned economy. When the PMI is above 50, it indicates growth in business activity, whereas a value below 50 indicates a contraction. This metric has consistently registered values of over 50 for all months in 2014 for the U.S. This indicates strong manufacturing activity in the U.S., which is reflected in U.S. Steel’s fourth quarter results. Steel demand in the North American Free Trade Agreement (NAFTA) region, which consists of the U.S., Canada, and Mexico grew by 3.8% in 2014, as compared to a 2.4% fall in demand in 2013. Strong price realizations and lower raw materials costs offset the impact of increased repairs and maintenance costs, and boosted the segment’s operating income to $247 million in Q4 2014, significantly higher than the figure of $87 million reported in the corresponding period of 2013. The U.S. Steel Europe (USSE) segment’s shipments rose to 1.11 million tons in Q4 2014, from 1.03 million tons in the corresponding period of 2013. However, realized prices for the segment declined roughly 13% to $600 per ton in Q4 2014. The fall in realized prices was largely as a result of a shift in the division’s product mix and lower input prices, particularly iron ore. Iron ore prices fell roughly 40% in Q4 2014, as compared to the corresponding period in 2013, due to a global oversupply situation. Despite a fall in realized prices, the segment’s income from operations improved to $34 million in Q4 2014 as compared to $12 million in Q4 2013. This was primarily because of lower raw materials costs and benefits from The Carnegie Way initiative. The results of the Tubular Products segment received a boost from the imposition of anti-dumping duties on the bulk of imported tubular steel products in Q3. Competition from imported tubular steels had negatively impacted the division’s realized prices and margins in the preceding quarters of 2014. The Tubular Steel segment’s shipments rose to 448,000 tons in Q4 2014 from 414,000 tons in Q4 2013, as competition from imported tubular steels dissipated. The  segment’s average realized price rose 7.7% year-over-year to $1,625 per ton in Q4 2014, as a result of reduced competition from imported tubular steels. Higher realized prices and benefits from The Carnegie Way initiative boosted the segment’s income from operations to $121 million in Q4 2014, from $32 million in Q4 2013. Impact of Low Oil Prices on Tubular Products Segment The recent decline in oil prices has negatively impacted the Tubular Products segment’s prospects. The company’s Tubular Products division produces and sells seamless and electric resistance welded (ERW) steel casing and tubing (commonly known as oil country tubular goods or OCTGs), standard and line pipe, and mechanical tubing. These goods are primarily sold to customers in the oil, gas, and petrochemical markets. West Texas Intermediate (WTI) crude oil spot prices stood at levels of around $53 per barrel at the end of December, around 50% lower  compared to their values in June of last year. The sharp reduction in oil prices has led to a decline in demand for OCTGs. Accordingly, the company has reduced its planned production volumes for next year. The company announced plans to idle its Lorain and Houston Tubular Products facilities earlier in January. The two plants combined produce around 800,000 tons of tubular steel out of the company’s overall production of around 1.75 million tons. In addition, the company recently announced plans to lower production levels at two other facilities, namely its plants in Lone Star, Texas and Fairfield, Alabama. Thus, the Tubular Products division’s shipments will fall drastically this year.   View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research  
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    Chevron Preview: Lower Oil Prices, Flat Production To Weigh On Upstream Earnings
  • By , 1/29/15
  • Chevron (NYSE:CVX) is scheduled to announce its 2014 fourth quarter earnings on January 30th. We expect lower crude oil prices to weigh significantly on the company’s upstream earnings growth. Benchmark crude oil prices have declined sharply over the past few months on rising supplies and falling demand growth estimates. The average  Brent crude oil spot price declined by more than 30% year-on-year during the fourth quarter. In addition, Chevron’s net upstream production is also expected to remain relatively flat year-on-year. However, we expect thicker downstream margins, primarily driven by the improvement in the global refining environment, to partially offset the impact of lower oil prices on the company’s overall performance. During the earnings conference call, we will be looking for an update on Chevron’s ongoing new project development, specifically the Gorgon liquefied natural gas (LNG) project in Australia that is expected to come online later this year. We will also be looking for an update on its operating strategy under the changed crude oil price environment. California-based Chevron is the second largest energy company in the U.S. after Exxon Mobil (NYSE:XOM). The company manages its investments in subsidiaries and affiliates, for which it provides administrative, financial, management, and technological support.  This extends both to its U.S. subsidiaries and to its international subsidiaries, engaged in fully integrated petroleum, chemicals, and mining operations, as well as power generation, and energy services. It generates annual sales revenue of around $230 billion with a consolidated adjusted EBITDA margin of ~21.8%. We currently have a  $114/share price estimate for Chevron, which is almost 13.2x our 2015 full-year adjusted diluted EPS estimate for the company. See Our Complete Analysis For Chevron Flat Upstream Production We expect Chevron’s average daily net upstream production to be relatively flat during the fourth quarter, compared to the year-ago quarter, as increased liquids (crude oil and natural gas liquids) production from tight oil plays in the U.S. and Argentina is expected to be mostly offset by lower production from Angola, due to a shut project, and Chad due to a recent divestment. We expect Chevron to continue to make good progress on its shale and tight resources development program. The company is the largest undeveloped leaseholder in the Permian region with approximately 2 million net acres and 17,000 drilling prospects. It has been an operator in the region since the 1920s and this legacy position provides it with the critical access to marketing infrastructure. More importantly, Chevron is not in a drill or drop situation in the region, which will allow it to withstand lower crude oil prices without sacrificing on profitability. During the third quarter, the company’s net upstream production received a boost of 40 thousand barrels of oil equivalent per day (MBOED) from increased unconventional development in the Permian and the Vaca Muerta shale in Argentina. We expect to see a similar growth in production during the fourth quarter as well. In addition, we also expect a continued production ramp up at the Papa Terra project offshore Brazil, which started producing oil in November 2013, to boost Chevron’s net upstream volumes during the quarter. However, the decline in base production coupled with the shutdown of the Angola LNG project due to technical issues, and the recent divestment in Chad, is expected to mostly offset the company’s fourth quarter production growth from new projects. Chevron’s $10 billion Angola LNG project has been plagued with several issues since its startup in mid-2013 due to a series of technical faults including electrical fires, pipeline leaks, and a slower than expected ramp-up of the downstream processing facility. In its latest annual SEC filing, the company noted that the project would be operating at around 50% of its peak capacity till 2015, when it expects to complete the required modifications to fix these technical issues. However, the plant has been offline since April 2014 due to a pipeline rupture, and Chevron now expects it to restart only by around mid-2015. Chevron is the operator of the project with a 36.4% working interest. The company also announced the sale of its interest in some oil fields and pipelines in Chad to the country’s government for around $1.3 billion in June 2014, which will further reduce its net upstream production growth during the fourth quarter. Chevron’s average daily net crude oil production from these assets stood at 18,000 barrels in 2013. Thicker Downstream Margins Chevron’s downstream margins improved significantly during the third quarter on lower benchmark crude oil prices and supplier discounts. Because of the sharp increase in crude oil production in the U.S., primarily because of increased tight oil development, imports by the world’s largest oil consuming nation have been declining recently. As a result, oil exporting countries like Saudi Arabia are looking for buyers elsewhere and offering discounts to benchmark prices in order to retain their market share. This oversupply scenario is benefiting refineries in Europe and Asia because of which, Chevron’s third quarter international downstream earnings increased by more than 340% year-on-year. We expect a similar performance during the fourth quarter to boost its full-year downstream EBITDA margins. However, in the long run, we expect global refining margins to continue to remain under pressure due to industry overcapacity, which stems from the fact that governments in different parts of the world are willing to run uncompetitive crude refineries at very low or no returns, to sustain employment and reduce their reliance on imported fuels. We currently forecast Chevron’s adjusted downstream EBITDA margin to increase to around 4% in the long run, which is more than 35 basis points below the 2012 level by our estimates. (See:  Key Trends Impacting Global Refining Margins ) View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    Qualcomm Reports A Strong Q1'15 But Lowers Guidance For Fiscal 2015
  • By , 1/29/15
  • Leading mobile chipmaker  Qualcomm (NASDAQ:QCOM) reported a strong Q1 2015, achieving record revenues and non-GAAP operating income in the quarter. At $7.1 billion and $1.34, revenue and non-GAAP earnings per share for the quarter were up 7% and 6% year on year, respectively. QCT (Qualcomm CDMA Technologies) accounted for approximately half of the upside on account of strong MSM demand and lower operating expenses, with the balance coming from improved total reported device sales, lower operating expenses in QTL (Qualcomm Technology Licensing), and other businesses, as well as the restatement of the R&D tax credit. Qualcomm’s QCT segment shipped a record number of its MSM (Mobile Satellite Modem)  chipsets and delivered its highest ever revenue and earnings before tax. The QTL business, which is facing challenges in China, came in ahead of expectations and the company resolved a previously disclosed dispute with a large Chinese licensee. The company is facing a governmental (NRDC) investigation for alleged monopolistic practices in China, in addition to ongoing regulatory investigations in the U.S. and Europe. It believes that the NDRC investigation is progressing towards a resolution, and remains focused on resolving the remaining challenges in China, though the timing of any agreement is uncertain. Despite the strong performance in Q1 2015, Qualcomm’s stock price declined by approximately 10% yesterday as the company announced that its Snapdragon 810 processor was dropped from the upcoming design cycle of a large customer’s flagship device (widely thought to be Samsung’s S phone upgrade). Qualcomm has consequently lowered its fiscal 2015 revenue target (mentioned below). Nevertheless, Qualcomm is confident that its long term outlook remains strong, both in smartphones and adjacent areas where its mobile technologies and capabilities can bring next generation solutions, areas such as automotive communications, the Internet of Things, mobile computing, networking, small cells and datacenter solutions. Our price estimate of $72 for Qualcomm is in line with the current market price. We are in the process of updating our model for the Q1 2015 earnings release. See our complete analysis for Qualcomm stock here Reduced Outlook For The QCT Business In The Second Half Of Fiscal 2015 Qualcomm’s QCT business achieved a number of records in Q1 2015, including shipments of 270 million MSM chipsets, revenues of $5.2 billion and earnings before tax of $1.1 billion. Revenue in MSM chip shipments were up 14% year on year as Qualcomm saw broad strength across multiple OEMs, driven by demand in emerging regions and strong device replacement in the U.S. Though Qualcomm’s outlook for the first half of fiscal 2015 is ahead of its initial expectation, the company has reduced its forecast for the second half of the year due to the following factors: 1. Due to technical issues, Qualcomm’s Snapdragon 810 processor will not be in the upcoming design cycle of a large customer’s flagship device (as we noted above, Samsung’s pending upgrade), impacting the company’s outlook for both volume and content in that device. 2. The company claims to be seeing a shift in share among OEMs at the premium tier, which has lowered the near term addressable opportunity for Qualcomm’s Snapdragon processors and has skewed the product mix towards more modem chipsets in this tier. 3. Although Qualcomm had a very strong competitive position exiting fiscal 2014, it has admitted to seeing heightened competition in China at the mid and high tiers. The company continues to gain share with OEMs based in China, but not at the pace previously expected. This is in part due to some product challenges with one of its chips in meeting some of the more demanding design points of mid and high tier segment. This has provided an opening to competitors who are being very aggressive in order to establish a position in the marketplace, resulting in more pricing pressure than previously expected. Qualcomm claims to have already addressed many of the initial product challenges in order to support early customer device launches in these tiers and continues to further enhance the performance of this chip. It expects to see a broad range of devices successfully launch and drive volume with this chip in the future. Though the company expects the above factors to impact its QCT revenue growth and operating margins in the near-term product cycle, its view of the long-term strategic environment and QCT’s leadership position remains strong. The design momentum for the Snapdragon 810 processor remains robust, with more than 60 products in the pipeline, including the recently announced LG G Flex2 and the Xiaomi Mi Pro Note. The Licensing Business Benefited From The Resolution Of Dispute With A Major OEM; Though There Are Still Are Some Licensees Under-Reporting Sales Qualcomm’s licensing business in China has been suffering since the last few quarters because of a dispute with Qualcomm licensees, under reporting by certain licensees, and sales of certain unlicensed devices in the region. However, the QTL business delivered a strong Q1 2015, with revenue and earnings ahead of expectations. Total reported device sales of $56.4 billion was slightly above the midpoint of the company’s prior guidance, with average selling price of $197 and reported shipments of 286 million 3G/4G based devices at the mid-point. In addition to a major Chinese licensee agreeing to report and pay royalties on past unreported sales, the resolution includes an expansion of the existing license agreement to include royalty bearing licenses for 4G only products, including 3-mode LTE smartphones sold for use in China. Qualcomm still believes that some other Chinese licensees are not reporting all of their sales of licensed products. The company has increased the number of audits that it is conducting of these licensees and is attempting to resolve the instances of under reporting. Qualcomm now has greater confidence that it will be able to collect royalties over time on substantially all LTE device shipments, including 3-mode devices in China and other currently unlicensed products. OEMs supplying a meaningful portion of 3-mode devices and lower Tier 3G connected tablets remained unlicensed. The company is undergoing discussions with many of these OEMs and claims to be making positive progress, though it will take some time to conclude all of the negotiations. Fiscal 2015 Outlook - Revenue in the range of $26 billion to $28 billion, up approximately 2% year-over-year at the midpoint. The revised guidance in lower than Qualcomm’s previous guidance midpoint by $800 million. - Non-GAAP earnings per share to be in the range of $4.75 to $5.05, down approximately 7% year-over-year at the midpoint and down 6% from Qualcomm’s previous full year guidance midpoint. - QCT operating margin in the range of 16% to 18%. - QTL operating margins of 85% to 86%. - Combined non-GAAP, R&D and SG&A expenses to grow approximately 3% to 5% year over year. Q2 2015 Guidance - Revenue in the range of $6.5 billion to $7.1 billion, up approximately 7% year over year at the midpoint. - Non-GAAP earnings per share between $1.28 to $1.40 per share, up approximately 2% year over year at the midpoint. - Non-GAAP combined R&D and SG&A expenses to be up 6% to 8% sequentially. - QTL: total reported device sales of $69.5 billion to $75.5 billion, up approximately 9% year over year at the midpoint. - OCT: total MSM shipments of approximately 220 million to 240 million units, down approximately 15% at the midpoint sequentially and up approximately 22% year over year at the midpoint. - Revenue per MSM to be relatively flat sequentially. - QCT operating margin of 16% to 17%. View Interactive Institutional Research (Powered by Trefis): Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
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    MasterCard Earnings Preview: U.S Economy Improves, FX Headwinds To Slow Growth
  • By , 1/29/15
  • tags: MA V AXP DFS
  • MasterCard (NYSE:MA) is scheduled to report earnings for the fourth quarter and full year 2014 on Friday, January 30. For the quarter ended September 30, the company reported a 13% year-over-year increase in net revenues to $2.5 billion due to an increase in gross dollar volume, cross border volume and transactions processed. We expect these drivers to have grown modestly in the last quarter as well, as the company focuses on expanding its digital payment platform globally. Additionally, the announcement of a share repurchase program and an increase in the quarterly dividend will further accelerate the growth of MasterCard’ stock. Holiday spending and continued improvement in the U.S. economy will positively drive growth for the fourth quarter. However, revenues earned from the international market may take a hit due the strengthening of the U.S. dollar. Overall, we expect MasterCard to report modest growth in the fourth quarter. We have a  price estimate of $83 for MasterCard’s stock, which is about in line with the current market price.
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    Altria Group Earnings Preview: Focus on Smokeless Products
  • By , 1/29/15
  • tags: MO
  • The Altria Group (NYSE:MO) is set to release its annual and Q4 2014 results on January 30. Below we take a look at what could be in store for the the company. The flagship cigarette category has been using pricing and market share gains to overcome market size reductions. Meanwhile, the smokeless and the innovative products categories have been experiencing trouble with market share gains. We analyze recent trends to get a picture of how these divisions may have fared in Q4 2014. We have a price estimate of roughly $44 for the Altria Group, which is nearly 20% below the current market price.
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    Bristol-Myers Squibb Earnings: Currency Headwinds Take The Shine Off Encouraging New Drug Sales
  • By , 1/29/15
  • Bristol-Myers Squibb (NSYE: BMY) reported its 2104 fourth quarter results on January 27th. The company’s revenues were down 4%, compared to the year-ago quarter. For the full year, the company’s sales revenue stood at $15.8 billion, down more than $500 million (nearly 4%) from what it achieved in 2013. The revenue decline was amplified to the tune of $184 million by the negative impact of a stronger U.S. dollar. Bristol-Myers Squibb expects currency headwinds to continue this year and has guided its full-year worldwide sales for 2015 to be between $14.4 and $15.0 billion. On a constant currency basis, the company is showing momentum, however, an its pipeline across several disease areas is improving.  The increasing adoption of blood thinner medicine Eliquis, continue growth in its immuno-oncology portfolio of therapies, and inscreasingly robust momentum in its Hepatitis C therapy are all contributing to the year-ahead outlook.   We expect these segments to drive significant earnings growth for Bristol-Myers Squibb in the coming years.
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    Baidu: Findings Its Way In Maps And Navigation Services
  • By , 1/29/15
  • tags: BIDU
  • Baidu (NASDAQ: BIDU) invested $10 million in mapping software maker Indoor Atlas in September 2014. While the deal size itself was small, the incremental revenue to Baidu from the use of this technology could be huge. This was also the latest in a series of moves in the navigation services space made by the three giant Chinese Internet companies that go by the acronym BAT- Baidu, Alibaba (NYSE: BABA) and Tencent (HKG: 0700). In this article we take stock of their forays into maps and navigation services.
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    3M Earnings: Weak Foreign Currencies Temper Revenue
  • By , 1/29/15
  • tags: MMM
  • 3M (NYSE:MMM) announced its fourth quarter results on Tuesday, January 27. The company reported a 2% increase in revenues, crossing $7.7 billion, driven by growth across all five business segments – Industrial, Safety and Graphics, Health Care, Electronics and Energy, and Consumer. Revenue growth was severely impeded by weak foreign currencies, as organic local currency revenue increased 6.3%, but was offset by unfavorable foreign exchange impact of 4.4%. Organic local currency sales do not include the impact of acquisitions or currency fluctuations. 3M’s net profits increased 7.0% as higher sales volume, better pricing and lower retirement benefits expense helped improve operating margins by 60 basis points year-on-year, to reach 21.5%. Higher profits and lower share count drove up earnings per share by 11.7%, to reach $1.81. For 2015, 3M expects its earnings to be in the range of $8.00-8.30 per share with organic local-currency sales growth of 3-6%. However, the impact of weak foreign currencies will likely temper revenue growth by 4-5%.
    0.3% Annual Returns: Stocks Priced to Deliver Savings-Account Returns Over the Next 8 Years
  • By , 1/29/15
  • tags: SPY TLT
  • Submitted by Sizemore Insights as part of our contributors program 0.3% Annual Returns: Stocks Priced to Deliver Savings-Account Returns Over the Next 8 Years by  Charles Lewis Sizemore, CFA Last week in the Ahead of the Curve section of Economy & Markets, John Del Vecchio wrote about how the U.S. stock market was expensive by historical norms, using one of his favorite metrics, the price/sales ratio. A price/sales ratio above 1.26 signals danger and at 1.71 we are well above those levels today. At ratios over 1.26, stocks are priced to deliver returns of about 0.70% per year based on past experience. Today, I’d like to expand on John’s points using one of my favorite metrics, the cyclically-adjusted price/earnings ratio (“CAPE”). The CAPE takes the current market price and divides it by an average of the past 10 years of earnings, adjusted for inflation. By taking a 10-year average, you smooth out the booms and busts of the economic cycle. It’s counterintuitive, but stocks can sometimes look cheap at the top of the economic cycle using the traditional price/earnings ratio when they’re actually very expensive. The CAPE smooths out this noise and gives better perspective. For the history buffs out there, Benjamin Graham, the father of the investment profession as we know it today and mentor to a young Warren Buffett, used the CAPE extensively and wrote about it in his classic Security Analysis. So, what does the CAPE tell us? Well, at a CAPE of 27.3, stocks today are more expensive than they were in 2008 and about on par with their valuation in 1929. The only time in history when stocks were more expensive was the go-go bubble years of the 1990s. Let’s play with the numbers a little. At these levels, the S&P 500 CAPE is 64.5% more expensive than its long-term average. This implies that we’ll see annual returns of about 0.3% per year over the next eight years. This needs a little explaining. There are three components that go into the calculation: the dividend yield, expansion or contraction of the CAPE to its long-term average and underlying business growth. The weakest link here is business growth. The assumptions made by GuruFocus here assume that business growth is in line with past averages, and that’s an assumption I’d rather not make right now given the debt, deflation and demographic issues facing the world’s major economies. Revising business growth lower would push expected returns even lower. But for our purposes here, we’ll roll with it. Let’s look at some scenarios. For the sake of argument, let’s say that this time it really is different and that because today bond yields are so abnormally low, they keep stock valuations artificially high. If we get lucky, and CAPE valuations don’t revert to their means, we might manage to squeak out between 2.9% to 5.2% annual returns over the next eight years, including roughly 1.9% in dividends. But given that markets tend to overshoot, swinging from overvalued to undervalued, I think it’s more likely we’ll see the negative returns you see in the table. In John’s piece, he noted that, unlike the 1990s, when you could actually find value outside of bubbly tech stocks, “everything” is overvalued here. And I agree. I’d add that by one metric the market is even more overvalued today than it was in 1999. The data John and I used covered the large stocks of the S&P 500, which is dominated by a small handful of mega-cap names. But Dartmouth professor Kenneth French recently found that the median stock—that “average” stock in the middle—is actually trading at the highest price/earnings ratio since World War II. This piece first appeared on Economy & Markets . Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the  Sizem ore Insights blog. This article first appeared on Sizemore Insights as 0.3% Annual Returns: Stocks Priced to Deliver Savings-Account Returns Over the Next 8 Years
    Playing Politics With the Keystone XL Pipeline
  • By , 1/29/15
  • tags: SPY UNG
  • Submitted by  Wall St. Daily as part of our  contributors program Playing Politics With the Keystone XL Pipeline By Tim Maverick, Commodities Correspondent   Unless you have been under a rock for the past year, you’ll know that the Keystone XL Pipeline has sparked a seemingly endless, bitter political fight between environmentalists and oil stakeholders. The main point of contention surrounds the XL part of the pipeline that’s planned to run from Hardisty, Alberta to Steele City, Nebraska. All the other parts of the pipeline are actually already built! So why all the fighting? After all, the energy industry came to the realization a while ago that this project may never be completed. Even President Obama urged people to move on in his State of the Union speech, saying: “Let’s set our sights higher than a single oil pipeline.” And yet this single infrastructure project seems to have become a proxy for the overall discussion about energy and economic growth and its effect on the environment. Fueling the Fire It all starts with Canada. Our northern neighbors have increased their exports to the United States by 63% over the past five years using two methods: rail shipments and other pipelines bringing Canadian crude to the Gulf Coast. Today, more than three million barrels a day of Canadian crude come into the United States daily. If built, the proposed $8-billion, 1,179-mile pipeline will transport 830,000 barrels of heavy crude from oil sands in Canada’s Alberta province to Nebraska, and then on to the Gulf Coast. But environmentalists say that obtaining heavy oil from oil sands produces a greater amount of greenhouse gases than other oil production methods. The climate campaign group,, and its Founder, Bill McKibben, started focusing on the Pipeline in 2011. James Hansen, a NASA climate scientist, and other experts added their voices to the cause, warning that burning the oil in Canada’s gigantic oil sands deposits would mean “game over” for the planet’s climate . Thus a big target was painted over the Keystone project since it would support and drive production in Alberta’s bitumen deposits. Misguided Tree Huggers McKibben’s organization and other environmentalists believe that stopping the Keystone XL would mean, in this new era of cheap oil, the end of further oil sands development. They do have a valid point in that respect. If oil keeps dropping, the transportation cost of shipping oil by rail will become a significant factor when oil sands companies consider whether a project is economically viable. Those costs could adversely affect overall shipments of Canadian crude into the United States in a low oil price environment. But many Keystone opponents are missing what’s right in front of their eyes – the other pipelines already built or close to being completed. You see, the oil industry has already made plans to get around the Keystone XL Pipeline political bottleneck. In fact, the recently completed Seaway Pipeline will nearly double the amount of heavy Canadian crude going to the Gulf Coast to almost 400,000 barrels a day. And in terms of mileage, in the time that the Keystone debate has gone on, there have been the equivalent to eight Keystone pipelines built across the country! So where will the debate go from here? The Game Plan The House, which has voted for the pipeline many times in the past, and the new Republican majority Senate are certain to push a bill through. Then the question is whether President Obama will veto it. He said most recently he would reject a Keystone XL bill, unless it was a part of a much broader infrastructure effort – an unlikely occurrence. The ball would then bounce back to the Senate . . . where Republicans will try scrounge up enough votes to override the President’s veto. During that sure-to-be fractious debate, environmentalists and Democrat allies will try to paint Republicans as “out of touch” and “climate change deniers.” However, many Republicans are likely to admit that climate change is real, but also say the pipeline would actually be a plus for the environment. Their argument being that the oil will be produced no matter what and simply shipped via other means. If the veto is overridden, the environmentalists will switch up their tactic. They may push hard for very stringent regulations of rail shipments of oil across the country. Or even try to block other pipeline projects. Whether the Keystone XL pipeline is approved or not, one thing is certain – production from Canada’s oil sands industry will rise, even if oil prices stay low. And the chase continues, Tim Maverick The post Playing Politics With the Keystone XL Pipeline appeared first on Wall Street Daily . By Tim Maverick
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    Negative-Yielding Bonds Proliferate
  • By , 1/29/15
  • tags: TLT SPY
  • Submitted by  Wall St. Daily as part of our  contributors program Negative-Yielding Bonds Proliferate By Alan Gula, Chief Income Analyst   Today, there exists roughly $4.6-trillion worth of negative-yielding government bonds around the world. Indeed, we’ve now entered a fifth dimension, beyond that which is known to most investors . . .  A dimension where bank deposit rates are negative, purchasing power is constantly destroyed, and risk can exist without return. In last week’s episode of the Fixed-Income Twilight Zone, the European Central Bank (ECB) announced its highly anticipated bond-buying program, or quantitative easing (QE). Each month until at least September 2016, the ECB will purchase 60 billion euros’ worth of bonds issued by euro-area central governments and agencies. The ECB also confirmed that its purchases would include negative-yielding bonds. The German yield curve is negative out to four years, and France’s is negative out to three years. Of course, buying negative-yielding bonds won’t do much to help the approximately 7.5 million Europeans between the ages of 15 and 24 who are neither employed, nor in education or training . . . Nonetheless, when economies are facing deflation, central banks ramp up stimulus. Japan, which has been on monetary morphine for years, has a yield curve below 0.1% all the way out to six years. Now, some institutional investors, pension funds, and insurance companies in Japan and Europe may have to hold ultra-low-yielding bonds in order to adhere to mandates or track benchmarks. But we’re under no such requirements. That’s why U.S. investors should avoid a group of international bond funds with sizable exposure to ultra-low-yielding government bonds. The Vanguard Total International Bond Index Fund ( VTABX, VTIBX ) has $27.6 billion in assets under management – three-quarters of which are government bonds. It has a 22.0%, 11.5%, and 9.5% allocation to Japan, Germany, and France, respectively. A similar ETF version of this fund, the Vanguard Total International Bond ETF ( BNDX ), has a lower allocation to Japan, but higher allocations to the U.K., Italy, and Spain. Another mutual fund, the American Century International Bond Fund ( AIDIX, BEGBX ), holds 94% government bonds and has a 25% exposure to Japan. Finally, a pair of State Street ETFs are stinkers, as well. The SPDR Lehman International Treasury Bond ( BWX ) should have been sold in mid-2014. Mathematically, I’m not even sure how a government bond fund would lose over 8% on a total-return basis in the past six months, but this fund did it. The SPDR Barclays Short Term International Treasury Bond ETF ( BWZ ) has such a low yield that it’s not worthy of consideration. From a risk-return standpoint, there’s really no reason to own any of these funds. Basically, bond portfolios loaded with Japanese government bonds, German bunds, and French OATs have a huge weight around their necks. I wouldn’t underestimate QE’s ability to artificially boost European financial asset prices (corporate bonds and stocks) and support excessive risk-taking, just as has occurred in Japan. Just make sure your bond funds don’t have significant exposure to the government bond markets in either region. As I predicted, U.S. rates have declined, following global rates lower. Treasuries are virtually “high yield” compared with bonds in many other developed nations. The U.S. 10-year is currently at 1.82%. And just imagine how far yields will fall if we get some real fear in the U.S. equities market. Yet traders are still hugely short Treasuries, aggressively betting on higher rates for some reason. Don’t make the same mistake as them . . . There’s no telling what could happen in the fixed-income fifth dimension. Safe (and high-yield) investing, Alan Gula, CFA The post Negative-Yielding Bonds Proliferate appeared first on Wall Street Daily . By Alan Gula
    D.R. Horton Immune to Winter Blast
  • By , 1/29/15
  • tags: DHI SPY
  • Submitted by Wall St. Daily as part of our contributors program D.R. Horton Immune to Winter Blast By Richard Robinson, Ph.D., Equities Analyst   As underwhelming as it was, the approaching storm in the Northeast muted the three major stock indexes on Monday. But the storm did nothing to dampen D.R. Horton ( DHI ). Shares of the country’s largest homebuilder by revenue climbed more than 5.4% on above-average volume. DHI closed the trading day at $24.36, or $1.26 higher, with more than 12.7 million shares trading hands. The catalyst? Strong first-quarter earnings, which were released Monday morning. Let’s take a closer look to see if DHI is still worthy of your attention right now . . . Clocking in a Strong First Quarter D.R. Horton is engaged in land development, construction, and the sale of residential homes in 27 states and 79 markets in the United States. And based on its latest quarterly results, the company is firing on all cylinders. In the company’s Q1 report release Monday morning, D.R. Horton reported revenue of more than $2.2 billion, a 38% increase over the same period a year ago. This was the company’s third straight quarter of accelerating revenue. D.R. Horton’s gross profit increased 21.2% to $438.6 million, while its operating profit increased 13.3% to $206.1 million in the first quarter. Net income for D.R. Horton was $142.5 million, or $0.39 per share, a 15.6% increase over the $123.2 million, or $0.36 per share, reported in the same quarter last year. The company’s plan to boost sales by offering incentives such as price cuts, free appliances, and reduced closing costs has started paying benefits. Orders in the first quarter rose 35.1% to 7,370 homes, while also growing 40% in value to more than $2.1 billion. The company also reported that the number of home closings in the quarter increased 28.8% to 7,973, and the total value of homes closed increased by 37.4% to $2.2 billion. Of course, the trade-off was a slightly lower margin, which fell to 19.8% from 22.3%, or 11.2% quarter over quarter. But the lower margin was built into expectations from company executives, as well as DHI’s competitors, Lennar ( LEN ) and KB Home ( KBH ), which warned of industry-wide margin compression earlier this year. Plus, the company benefits from a major tailwind: a growing backlog of homes. You see, the company concluded its first quarter with a backlog of 9,285 homes, an increase of 20.8% from the backlog at this time last year. The value of the backlog has increased, as well, growing 20.8% to more than $2.7 billion. Firm Enough Foundation? Despite the post-earnings pop in D.R. Horton’s stock, a compelling case can be made for investors to pick up shares of DHI while interest rates remain low. Shares trade at favorable forward valuations, including 12.9x FY 2015 estimated earnings of $1.86 . . .   and 11x FY 2016 estimated earnings of $2.18. Further “cementing” the investment case is the fact that the company pays an annual dividend of $0.25, giving it an admittedly unspectacular 1.04% yield at current levels. Good investing, Richard Robinson The post D.R. Horton Immune to Winter Blast appeared first on Wall Street Daily . By Richard Robinson
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    Shell Earnings Preview: Lower Upstream Earnings, Thicker Downstream Margins Expected
  • By , 1/28/15
  • tags: RDSA rdsa XOM CVX BP PBR
  • Royal Dutch Shell Plc. (NYSE:RDSA) is scheduled to announce its 2014 fourth quarter earnings on January 29. We expect lower crude oil prices to weigh significantly on the company’s upstream earnings growth. Benchmark crude oil prices have declined sharply over the past few months on rising supplies and falling demand growth estimates. The average  Brent crude oil spot price declined by more than 30% year-on-year during the fourth quarter. This is expected to result in thinner operating margins on Shell’s spot crude oil sales. However, lower exploration expense and thicker refining margins are expected to partially offset the impact of lower oil prices. During the earnings conference call, we will be looking for an update on Shell’s ongoing divestment program and its operating strategy under the changed crude oil price environment. Shell is an integrated oil and gas company that is registered in England and Wales and headquartered in The Hague, the Netherlands. It has a strong global presence. The company is involved in the principal aspects of the oil and gas industry (exploration and production of hydrocarbons, refining and marketing of petroleum products, and chemicals manufacturing) in more than 70 countries worldwide. This geographical diversity of Shell partially insulates it from operational and financial risks arising from regional regulatory and geopolitical uncertainties. We currently have a  $71/share price estimate for Shell, which is almost 12.2x our 2015 full-year adjusted diluted EPS estimate for the company. See Our Complete Analysis for Royal Dutch Shell Plc. Lower Exploration Expense Lower oil prices are expected to have a significant impact on Shell’s upstream earnings. According to the company’s 2014 third quarter earnings call transcript, 65% of its upstream revenues are directly linked to crude oil prices and a $10 per barrel decline in Brent crude oil prices translates into a $3.2 billion earnings impact on an annual basis. This means that depending upon the overall lag (between fluctuations in spot prices and their impact on Shell’s earnings because of the average tenure of pricing contracts), the recent decline in oil prices could cause its fourth quarter upstream earnings to be as much as $2.4 billion lower, compared to the previous year’s quarter. However, we believe that lower exploration expense and improvement in sales volume-mix will partially offset the impact of lower oil prices on Shell’s upstream earnings. The key reason behind the steep decline in Shell’s adjusted E&P margins in 2013 was the sharp increase in exploration expense. The company’s exploration expense increased by 70% over 2012 and was more than 136% higher than the average annual exploration expense between 2008 and 2012. This was primarily because the company had to write down costs related to a large number of dry holes in the Americas. However, during the first nine months of 2014, the company’s exploration expense stood at just $2.9 billion, which is almost 17.5% lower than the same period the previous year. Going forward, we expect Shell’s exploration expense to be more normalized as the company has significantly trimmed down its exposure towards more risky acreage as a part of its ongoing divestment program. Thicker Refining Margins We expect Shell’s downstream margins to receive a significant boost from thicker refining margins during the fourth quarter, primarily driven by an improved global refining environment and reduced exposure to less profitable downstream assets as a result of the divestment program. Shell has been actively pursuing the divestment of its not-so-profitable downstream assets over the past few years and it plans to continue doing so in the near future in order to increase the profitability of its overall portfolio. Since 2010, the company has generated around $10 billion in proceeds from such transactions. Recent downstream divestments completed by Shell include refinery sales in the U.K., France, Germany, Norway, and Czech Republic. Most recently, the company announced the sale of its Norwegian marketing assets to Finland’s ST1. As a part of the deal, ST1 will take over Shell’s retail, commercial fuels, and supply and distribution businesses in Norway. In addition, Shell’s aviation business in Norway will become a 50-50 joint venture with ST1. Improvement in refining margins and operating rates boosted Shell’s downstream earnings by $500 million during the third quarter last year, compared to the previous year’s quarter. We expect a similar performance during the fourth quarter as well. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    Our Take On Windows 10: What It Could Mean For Microsoft
  • By , 1/28/15
  • tags: MSFT GOOG IBM
  • Recently, at a launch event, Microsoft (NASDAQ:MSFT) shared more information about Window 10, which was launched for beta testers in September last year. While the operating system is expected to be launched later this year, it will be a free update for users running Windows 7 or Windows 8.1 on PCs or notebooks for the first year. According to the latest data, Windows 10 attracted close to 1.7 million beta testers (initial users that test the software for bugs). This indicates that Windows 10 might surpass the earlier versions of Windows, especially Windows 8, in term of subscribers. In this note, we explore how the Windows 10 might boost Microsoft’s revenues. See our complete analysis of Microsoft here Installed Base to Help As Weak PC Sales Continue Windows Operating System is Microsoft’s third largest division and makes up 9.7% of its stock value by our estimates. However, it contributes 25% to Microsoft’s top line. One of the primary drivers for Microsoft’s Windows division is global PC sales. Approximately 65% of total Windows Division revenue comes from Windows operating systems purchased by original equipment manufacturers (“OEMs”) and pre-installed on their devices. According to IDC, the global PC sales continue to decline and global shipments were down by 2.4% in Q4, and 2.1% in 2014. Although, IDC expects that PC sales will pick up in 2015, we think that global PC sales will remain tepid. Currently, we forecast that the global desktop sales will decline by 5% to 130 million and global notebook market to remain flat at 180 million units shipped in 2015. However, as the company has offered the free Windows 10 update to the existing users of Windows 7, Windows 8 and Windows 8.1, we believe that Windows 10 will have widespread adoption amongt users. To ensure that Windows 10 finds traction with early adopters, Microsoft has gone beyond purely visual changes like reworked desktop icons. Windows 10’s start menu will now expand to a full-screen view that looks like Windows 8.1’s home screen so that users are familiar with the new OS. Focus On Mobiles Through Cross Device User Experience And New Features One of the primary reasons for decline in PC shipments is the growing popularity of tablets. According to Gartner, tablets shipments to exceed those of PCs in 2105. While iOS and Android based smartphones and tablets continue to rule the market, Microsoft’s Windows based Surface tablets and phones have not fared as well.  According to IDC, Windows based tablet’s market share was 2.5% in Q4 2014. Despite offering discount on its tablets, and selling smartphones at lower price points, Windows mobile sales continue to lag the tablet market. While Windows 8/8.1 was targeting tablets and PCs, Windows 10 can be used with devices less than 8 inches in size. Through this cross compatibility, Windows will be able to sell more windows based smartphones, and this will grow the Windows architecture user base. Moreover, Microsoft is focusing on rectifying a major flaw in Windows 8 by introducing universal apps that would help the phone to work with other major apps like Instagram or Gmail. Microsoft’s own applications – from Xbox to Office can further supplement app development program, which would be a meaningful step up for Windows 10 Phone store. A stronger Windows Phone OS, with better apps and developer support, could make Windows ecosystem the third platform behind Google’s Android OS and Apple’s iOS. This may help convince customers to persist with Windows PCs and tablets. This can incentivize app development and create a sustainable and profitable ecosystem for developers and users to thrive in, thus improving user experience. We currently have a  $44.46 price estimate for Microsoft, which is 5% below the current market price. Understand How a Company’s Products Impact its Stock Price at Trefis View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    Aeropostale's Revised Q4 Guidance Isn't Promising As Its Old Story Continues
  • By , 1/28/15
  • tags: ARO AEO ANF
  • Teen apparel retailer,  Aeropostale (NYSE:ARO), reported its holiday sales results earlier this month, and raised its Q4 guidance slightly on account of better-than-expected margins. The company now expects to report a loss per share of $0.25-$0.31 for the fourth quarter of fiscal 2014, as opposed to its previous guidance of $0.37-$0.44. Aeropostale stated in a recent press release that the retailer achieved better margins during the holiday season than it originally expected and managed its inventory properly. The company believes that it will end the fourth quarter with a clean inventory position, that should have a slight negative impact on markdowns going forward. While Aeropostale’s bottomline performance during the holiday season was slightly better than expected, it continues to report significant decline in revenues. The company’s revenues for the two month period of November and December 2014 declined 11% to $508 million. Its comparable store sales including e-commerce fell 9%, on top of 15% decline witnessed during the same period last year. Reporting revenue declines in double digits is something that Aeropostale has persistently done over the past several quarters. Our price estimate for Aeroposatle is at $6.38, implying a premium of less than 115% to the current market price.
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    L'Oreal's Top Acquisitions And The Underlying Strategies
  • By , 1/28/15
  • tags: LRLCY EL REV AVP
  • L’Oreal (OTC:LRLCY) is the international leader in cosmetics and beauty care and competes with other notable pure-play cosmetics manufacturers like Estee Lauder (NYSE:EL), Shiseido, Avon Products (NYSE:AVP) and Revlon (NYSE:REV). The company also competes with cosmetics products from global consumer product companies such as Unilever (NYSE:UL), Procter & Gamble (NYSE:PG) and Beiersdorf. In results posted thus far for 2014, L’Oreal witnessed a moderate 2014, as judged by its financial performance. For the first nine months of 2014, L’Oreal reported a sales contraction of 0.4% to €16 billion. Like-for-like sales, which exclude currency headwinds and other inorganic growth impacts, increased 3.5% during the nine months in FY14. In this article we discuss the major acquisitions undertaken by L’Oreal in 2014 and the strategic significance of each deal. In 2013, the top three markets accounting for around 50% of the world’s beauty market growth were China, Brazil, and the U.S. Hence, it comes as no surprise that L’Oreal’s major acquisitions in 2014 focused in those regions. We have a  $37 price estimate for L’Oreal, which is at a slight premium to the current market price. See Our Complete Analysis for L’Oreal Here China’s Magic Holdings: L’Oreal Battles To Gain A Larger Share Of The Chinese Beauty Market With The Aid Of An ‘Ins ide Player’ In April 2014, L’Oreal completed the acquisition of Magic Holdings in China. The Chinese beauty and cosmetics market is the third largest market globally, after North America and Japan, and had a market sales of approximately $23 billion in 2013. Within this huge market, L’Oreal reported sales of over $2 billion in 2013. This translates into a 9% market share for L’Oreal in the overall Chinese beauty market. However, the company has faced intense pressure from domestic players within the mass-market cosmetics space and has bowed out of the Chinese hair care market by shutting down its Garnier brand. L’Oreal still commands market leadership positions in beauty and make-up cosmetics in China, with L’Oreal Paris and Maybelline New York being the number one brands in their respective segments. However, domestic players, like Shangai Jahwa United, have displayed a better understanding of the Chinese consumer tastes. The company’s brand ‘Herborist’ uses traditional Chinese medicinal and herbal practices in developing its beauty products and has shown strong resonance with Chinese consumers. Adapting such practices  has given domestic Chinese beauty players a decent lead over large, international players. To counter this strengthening competition from domestic players and retain their market share, global beauty companies have been on an ‘acquire-to-grow’ strategy in the Chinese market. L’Oreal announced its acquisition of Magic Holdings International Limited for $850 million in 2013, which is the company’s largest acquisition in the Chinese market. Magic Holdings is the leader in the Chinese facial care market, with annual revenues that grew 14% on a constant currency basis to reach $220 million in 2013. The acquisition of Magic Holdings indicates L’Oreal’s stance against domestic competition. (For more on L’Oreal’s previous acquisitions, see L’Oréal Vies For Top Spot In Growth Markets With Rapid Acquisitions ) NYX Cosmetics: L’Oreal Aims To Win North American Hearts And Wallet Share With A Broader Make Up Portfolio L’Oreal’s acquisition, NYX Cosmetics, is a high-growth mass market makeup cosmetics brand with presence in more than 70 countries globally. The company is a direct competitor to Estee Lauder’s M-A-C brand of makeup cosmetics and has seen explosive growth in sales over the last two fiscal years. Sales for NYX Cosmetics increased by 46% and 57% in the years ending May 2013 and May 2014, to reach $93 million. L’Oreal wants to replicate the success it had with brands such as Maybelline and Kiehl’s in the makeup space. Prior to  the acquisitions in 1996 and 2000, Maybelline and Kiehl’s had revenues of $300 million and $30 million, respectively. Now, Maybelline and Kiehl are L’Oreal’s most popular brands in the low-end and prestige makeup space, with annual revenues of approximately $2.7 billion and $810 million, respectively. The long term acquisition strategy has payed off very well for L’Oreal until now, and NYX should contribute to its success going forward. The acquisition of NYX Cosmetics should add support to a recovery in the weak North American market. Impacted by adverse weather conditions and a slowdown in the North American beauty market has resulted in weak consumer offtake for cosmetics. L’Oreal’s growth in the North American cosmetics market slowed down from 4.4% in 2012 to 2.6% in 2013, while other developed markets showed signs of expansion. Going forward, the company expects the North American market to rebound to higher growth driven by an expansion in trendy mass market color cosmetics such as NYX Cosmetics, M-A-C, and UrbanDecay. Decléor and Carita: L’Oreal Expands Its Presence In The Professional Beauty Division In April 2014, L’Oreal completed the acquisition of Decléor and Carita from the Japanese group Shiseido. The turnover for Decléor / Carita was around 100 million euros in 2012. Decléor and Carita hold a second position worldwide, in the global Professional Spa and Beauty Institute market. The brands have been integrated into L’Oreal’s Professional Products Division, a category where L’Oreal has been a major player for more than 100 years. The acquisition would ensure L’Oreal’s entry into new distribution channels in the professional beauty segment, such as day spas, resorts, and destination spas which specialize in skin care. Niely Cosmeticos: L’Oreal Penetrates Further Into Brazil, One Of The Fastest Growing Beauty Markets In September 2014, L’Oreal signed an agreement to acquire Brazil based Niely Cosmeticos, the largest independent hair care and hair coloration company in the country. The company earned 405 million Brazilian Reals (140 million euros) in 2013. Aimed at the middle class mass market, Niely products have a large penetration in Brazil, with a wide distribution network including retailers and wholesalers, supermarkets, pharmacies and perfumery chains. L’Oreal gained 9% of its sales from the Latin American region in 2013, and sales in Brazil grew by 13% year-on-year. Brazil is currently the fourth largest beauty market in the world, with a number 1 position in hair care, hair colorants, and deodorants. L’Oreal Brazil is the sixth largest subsidiary for the L’Oreal Group. L’Oreal aims to improve its largest division, the consumer products, through this acquisition. As we had mentioned in our earlier article that lately, the consumer products division has shown a lack of robust growth for L’Oreal.  Brazil being the largest hair color and hair care market and Niely being one of the most prominent players in this segment, we expect Niely to boost L’Oreal’s sales in Brazil and later on, internationally. Coloright: L’Oreal Strives To Maintain Its Leadership In Hair Research In December 2014, L’Oreal announced the acquisition of Israel-based hair research start-up, Coloright. Coloright develops hair-fibre optical reader technology and it will be a part of L’Oreal’s international Research and Innovation network. According to L’Oreal’s estimates, the top two contributors for the global beauty market are skin care (34%) and hair care (24% ). L’Oreal has always been a pioneer in hair research, and this acquisition will further aid the company in being one of the forerunners in hair care related innovations. View Interactive Institutional Research (Powered by Trefis): Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
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    Volkswagen's Push For Electric Vehicles Gains Further Momentum
  • By , 1/28/15
  • Volkswagen AG (OTCMKTS:VLKAY) crossed record sales of 10 million units in 2014, narrowing its gap with the global sales leader Toyota, and extending its lead over the third-placed General Motors, in terms of volumes. The German automaker makes large investments in new technologies, construction of manufacturing facilities, and assembly lines, in order to increase supply closer to the end customer and ensure strong volume growth. Volkswagen incurred $11.13 billion in research and development costs through the first three quarters, 14% more than its 2013 levels. The group has accelerated investment in cleaner and low emission technologies, in a bid to launch more environmentally viable cars in the future. In China, Volkswagen’s single largest market, the company is looking to launch over twenty electric and plug-in hybrid electric vehicles over the next few years, ranging from small-sized cars to large SUVs. The luxury vehicle division, Audi, which forms a fifth of the automaker’s valuation by our estimates, plans to step-up investment by 2 billion euros ($2.44 billion) to a record 24 billion euros over the next five years, of which approximately 70% will be in new cleaner technologies such as plug-in hybrid vehicles. Volkswagen, which boasts a diverse portfolio of brands, including passenger vehicle divisions Skoda, Audi, Porsche, Bentley, Bugatti, Lamborghini, commercial vehicle brands Scania and MAN, and its own branded cars and trucks, has lost out to the likes of GM, Ford, Nissan, BMW, and Tesla in the fast growing electric vehicle (EV) segment. By accelerating investments, the German car company hopes to gain momentum in the plug-in electric vehicle (PEV) space, which is estimated to grow at a CAGR of almost 25% through 2023, outpacing the expected 2.6% annual growth for the overall light-duty vehicle market. Apart from China, which is the most important market for Volkswagen volume-wise, the automaker’s push for PEV growth is evident in the U.S., the world’s largest PEV market, and which grew by 22.8% last year to almost 120,000 units. We have a  $44 price estimate for Volkswagen AG, which is roughly 3% lower than the current market price. See Our Complete Analysis For Volkswagen AG Volkswagen Teams Up With BMW Demand for electrically powered vehicles is rapidly rising around the world mainly due to a relatively less harmful impact on the environment, rising concerns over global warming, and lower running costs, as compared to gasoline-powered engines. In addition, governments around the world provide various incentives to boost electric vehicle sales. Moreover, electric vehicles also have lower battery prices, adding to their appeal. However, the absence of a well established battery-charging infrastructure and weak efforts to expedite building of charging networks has hurt EV sales, dissuading customers from buying such vehicles, especially the ones with a low electric range. The Volkswagen e-Golf, an all-electric car launched in the U.S. at the tail-end of October, has only around 70-90 miles of electric range. In contrast, the Tesla Model S can go 265-300 miles on a single charge. In a bid to compete better with the likes of Tesla, Volkswagen is now teaming up with BMW to build 100 direct current (DC) fast charging ports across the U.S. this year. The two companies are working with ChargePoint, a startup that already operates a network of card-operated chargers. The new charging stations will add to ChargePoint’s present network of 20,000 stations in North America. Tesla is also in the middle of expanding its Supercharger network across the continent, but the stations only support a Tesla model. On the other hand, the new charging stations being built by the German automakers will support any vehicles with DC fast charging capabilities and those that use the SAE Combo connector, which is used in both Volkswagen and BMW EVs, among others. The new Volkswagen-BMW collaboration will augment battery-charging facilities in the U.S., and as the new stations won’t be placed more than 50 miles apart, concerns regarding low electric ranges of EVs will also be addressed. Volkswagen isn’t a big player in the PEV space in the U.S. as of now, but the company could extend its partnership with BMW, and maybe other electric vehicle manufacturers, to add more charging stations in the country in the future.  EV sales as a whole could rise at a fast pace if big-time automakers decide to collaborate and build infrastructure that supports these vehicles, as opposed to each individual company building its own exclusive charging stations. New Technology Could Shake-Up The EV Market Apart from building more charging stations in the U.S., Volkswagen is also investing in a completely new technology that could potentially shake-up the PEV market.  Last month, Volkswagen Group of America bought a 5% stake in QuantumScape Corporation, a battery start-up, aiming to develop a new energy-storage technology that could more than triple the range of an electric car. QuantumScape is working on solid-state batteries as a substitute for the lithium-ion technology, which is used in many electric vehicles today. By doing so, the company believes the range of an electric car could be extended to nearly 430 miles (more than the electric range for Tesla). Another advantage of the solid-state batteries is that these are burn resistant, boosting the safety aspects of electric vehicles using such battery packs. The new battery technology is only in the initial testing stage as of now, and the tests to show if the system is viable for cars are expected to be completed not before the end of 2015. But Volkswagen’s aim is clear — to solve the low-electric-range problem by building a closely-packed network of battery-charging stations and/or developing new technology to improve ranges on its vehicles, thereby boosting the company’s prospects in the electric vehicle market. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    EA Logo
    Electronic Arts Q3 Earnings: Record Digital Revenue Drives Revenues Growth
  • By , 1/28/15
  • The Gaming giant, Electronic Arts (NASDAQ:EA),  delivered impressive financial results in its third quarter earnings report released on January 27. For the quarter, the company reported non-GAAP net revenue of $1.43 billion, which was 12% above the guidance, but down 9% year-over-year (y-o-y). However, last year’s third quarter witnessed the launch of Battlefield 4, giving it an advantage over this year’s holiday quarter, which was without the launch of new Battlefield title. On a trailing twelve month basis, EA’s non-GAAP net revenue reached $4.337 billion, and digital receipts accounted for more than half of the revenues ($2.178 billion) for the first time ever, up 17% y-o-y. The company’s core sports titles: FIFA 15, Madden NFL 15, and Hockey Ultimate Team services recorded a massive 82% y-o-y growth. 2014 proved to be a huge success for EA, as it was the #1 publisher on all the major platforms in the world. The company’s successful quarter is credited to its 3 major titles: FIFA 15, Madden NFL 15, and Dragon Age: Inquisition. Their success, coupled with effective cost controls, led to a 250 basis points improvement in the operating margins to 36.3%.  EA’s non-GAAP digital revenues for the quarter rose 34% y-o-y to $693 million. Moreover, EA’s mobile games had an average of more than 160 million monthly active users in Q3. Our $39 price estimate for  Electronic Arts’ stock is 20% below the current market price. See our complete analysis of Electronic Arts stock here EA’s Major Title Releases Spurred Revenue Growth Dragon Age: Inquisition Developed by Bioware, this third edition of the major action role-playing franchise Dragon Age was released in November worldwide. The game widely became popular just after the release, making it the most successful launch in the Bioware history. Till date, nearly 113 million hours have been spent on this game by the gamers, with the count increasing day by day. It was named the game of the year by several media outlets. According to VGChartz, as of January 3,  nearly 1.3 million units of this game was sold on Sony’s PlayStation 4, whereas approximately 0.60 million units were sold on Microsoft’s Xbox One. Taking all the gaming platforms into account, the game sold over 3 million units till that date, with even more demand on new generation consoles. FIFA and Madden NFL Over the last decade, EA’s dependence on its sports franchises,  Madden NFL and FIFA, has increased manifold. Both titles are the most popular and most widely played sports games in their respective regions. According to VGChartz, FIFA 15 sold over 15.65 million units till January 3, with Sony’s PlayStation 4 & 3 leading the FIFA sales with 5.79 million and 4.30 million units, respectively. On the other hand, FIFA 15 sales on Xbox One was nearly 1.8 million units. Europe accounted for almost 60% of the FIFA 15 unit sales on PlayStation 4. The games weekly unit sales increased by nearly 40% and 70% in the last two weeks of November respectively. The increase in demand for the sports titles just before the holiday quarter was anticipated by the company. FIFA 15 was the #1 title in Europe and #10 title in the U.S. in 2014. According to the company, there were 50% more gamers logging in each week y-o-y. On the other hand, America’s favorite sports title, Madden NFL, was the #2 selling title in North America. Gameplay hours for the title rose 30% y-o-y. The game has sold over 5.4 million units till date, with North America accounting for 87% of the total sales. Both the sports tiles might still account for more than two-thirds of the total sports titles sold in 2014, and might continue to be the money minting franchises for the company. Other Titles EA’s other popular titles, such as The Sims 4, Titanfall, and Battlefield 4, provided a huge boost to the company’s quarterly revenues. The company released three major updates to The Sims 4 during the third quarter, as the title went to sell nearly 1.5 million units by the end of 2014. Moreover, the company also released a new expansion pack for Star Wars: The Old Republic, in December, that attracted many new gamers. On the other hand, EA’s first-person shooter (FPS) titles: Titanfall and Battlefield 4, are still contributing to the revenue growth. Digital Growth: The Next Big Segment For EA For the third quarter, EA reported 34% y-o-y growth in its non-GAAP digital revenues, and 32% y-o-y growth in GAAP digital revenues. The Ultimate Team services for FIFA 15, Madden NFL 15, and NHL 15, contributed tremendously to the digital growth. In Q3, the total number of gamers signing in for the Ultimate Teams for these three games grew by nearly 45% y-o-y. This indicates the increasing interest of gamers in the digital online format of gaming. On the other hand, the recently launched SimCity BuildIt recorded more than 22 million downloads in the first month of its launch, grabbing a spot in the Top 5 iOS game downloads in more than 100 countries. Among the digital revenues, Extra content and “freemium” contributed $314 million, up 47% y-o-y, primarily due to the Ultimate team services. This segment continues to see great potential, as more gamers are drawn towards the Ultimate Team concept, and might remain the largest contributor in the digital domain. FIFA Online 3 continues to show progressive growth in Korea, whereas in China  FIFA Online is becoming popular. Full game downloads contributed $140 million to the net revenues in Q3, up 22% y-o-y, whereas mobile revenues were up 13% y-o-y. Mobile platform had an impressive holiday quarter, due to the success of FIFA 15 Ultimate Team Mobile, Madden NFL Mobile, and SimCity BuildIt. As a result, due to the increase in demand of Digital content, which has low costs, the company’s non-GAAP gross margin for the quarter was 72.8%, up from 68.1% in Q3 last year. Moreover, the strong demand for current generation consoles also helped the company improve its profitability. With the sustained demand for these consoles, and the release of new Battlefield titles, we might see another strong quarter. Keeping these factors in mind, the company expects the non-GAAP net revenues to be approximately $830 million in the Q4, and non-GAAP diluted EPS to be approximately $0.22. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    DD Logo
    Lower Seed Prices, Currency Headwinds, Weigh On DuPont's Earnings Growth And Outlook
  • By , 1/28/15
  • tags: DD DOW MON
  • DuPont’s (NYSE:DD) fourth quarter earnings rose  on better margins in Agricultural Products and the Performance Materials divisions. Margin expansion was primarily driven by productivity measures and gains on asset sales.  However, lower seed prices and currency headwinds weighed on the company’s earnings growth. DuPont’s 2014 full-year adjusted diluted earnings per share (EPS) came out at $4.01, 3.4% higher compared to the previous year, but fell short of our estimates by around $0.03. The company guided for relatively flat net revenue this year, primarily on account of the offsetting impact of the strengthening U.S. dollar, while EPS adjusted for non-recurring, non-operating items is expected to fall in the range of $4.00 to $4.20. DuPont generates annual sales revenue of around $35 billion by supplying high-performance materials and chemicals, electronic materials, high-performance coatings, and agricultural products to industries and consumers worldwide. Most products manufactured by DuPont are used as raw materials by other industries, making it a predominantly B2B (business-to-business) based company with the exception of the agriculture and nutrition divisions. Its consolidated adjusted EBITDA margin stood at around 21% last year. Based on the recent earnings announcement, we have revised  our price estimate for DuPont to $70/share, which is 17.2x our 2015 full-year adjusted diluted EPS estimate of $4.06 for the company. See Our Complete Analysis For DuPont Lower Seed Prices According to our estimates, DuPont’s Agricultural Products division contributes the most, around one-third, to its total value.  In 2013, the division posted the highest revenue growth (13% y-o-y) within the company’s diversified portfolio, on robust demand for its  AQUAmax and  AcreMax seed products and  Rynaxypyr insecticide. However, 2014 was not a great year for the division. During the year, DuPont’s agricultural products sales revenue declined by 4% y-o-y due to lower corn and soybean seed prices and market share loss in the Americas. The prices of corn and soybean seeds, which make up a large chunk of DuPont’s agricultural products sales, plummeted last year due to record harvest projections in the U.S., primarily led by favorable weather conditions and yield improvements. This had a significant impact on DuPont’s earnings growth during the period because agricultural products contribute almost 33% to the company’s total consolidated sales revenue. In addition to lower seed prices, DuPont’s Agricultural Products division was also negatively impacted by lower demand for corn seeds.  Farmers increasingly shifted away from planting corn last year due to better economies offered by the soybean crop under the prevailing pricing and yield scenario. However, DuPont was not able to tap the increase in soybean seeds demand to offset the decline in its corn seeds sales because its soybean line-up is undergoing a transition towards newer seed varieties. With little or no improvement expected in seed prices in the short to medium term due to growing distributor inventories, we see the demand for corn seeds to remain weak in 2015 as well, which is why we expect DuPont’s agricultural segment to post lower revenues and thinner margins this year. Currency Headwinds DuPont has operations in more than 90 countries worldwide and about 60% of its consolidated net sales revenue comes from international markets. Since the company operates primarily in local currency in these markets, a strengthening U.S. Dollar negatively impacts its financial results. The U.S. Dollar has strengthened significantly against many international currencies, especially the emerging market currencies, since the second half of 2013 when the U.S. Federal Reserve started scaling back its bond-buying program. According to historical currency charts provided by, the U.S. Dollar has strengthened by around 20%, 9%, and 105% since the beginning of 2014 against the  Euro (EUR),  Brazilian Real (BRL), and the  Russian Ruble (RUB), respectively. Based on the average basket of exchange rates for its business, DuPont currently expects the strengthening U.S. dollar to drag down its 2015 full-year earnings by $0.60 per share. Although, we believe that the actual impact on earnings could be higher since the depreciation of a local currency against the U.S. dollar might lead to higher relative prices of DuPont’s products in the local market, thereby weakening its competitive positioning as well. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    PG Logo
    Falling Volumes Compound P&G’s Problems as Currency Headwinds Dampen Q2 Results
  • By , 1/28/15
  • tags: PG UL KMB CL EL
  • Global consumer products powerhouse Procter & Gamble (NYSE: PG) reported disappointing second quarter results on January 27th (fiscal year ends in June). The company’s scale played against it in the second quarter as its outsized presence in emerging markets exposed it to severe currency headwinds. Consequently, increased pricing was not sufficient to prevent revenue from falling 4% year on year due to a negative foreign exchange impact of 5 percentage points. Likewise, cost savings could not preclude a year on year decline of 40 basis points in gross margin, which faced the brunt of unfavorable geographic and product mix also. Additionally, heavy impairment and restructuring charges dragged down net income as well as diluted EPS by 31%. Second quarter revenue stood at $20.1 billion, while net income was $2.4 billion and diluted EPS was $0.82. P&G’s performance was not much better in non-GAAP terms either, which excludes the impact of foreign currency movements. Organic sales expanded by 2% year on year during the quarter, which was at the lower end of the company’s guidance of low to mid-single digit organic sales growth. Core EPS, which excludes discontinued operations and restructuring charges, declined by 2% year on year to $1.06. This puts P&G in a difficult position to achieve its full year guidance of low to mid-single digit growth. However, on a constant currency basis, core EPS grew by 6% in the second quarter, which keeps the company in the run for achieving the full year guidance of double digit growth in constant currency core EPS. We are currently updating our price estimate of $87 for Procter & Gamble to reflect the second quarter results. See our complete analysis of Procter & Gamble here Currency Headwinds Eat Into Revenue Growth Adverse foreign currency movements dealt a severe blow to Procter & Gamble’s second quarter top line and depressed revenue growth by 5 percentage points. Foreign exchange impact on the company’s business units ranged from 4 to 7 percentage points. The total foreign exchange impact on the bottom line was to the tune of $450 million in the second quarter alone; and the cumulative effect in the current fiscal year is estimated to be at $1.4 billion. Over $1 billion of this headwind is expected to originate from just six countries, namely Russia, Ukraine, Venezuela, Argentina, Japan and Switzerland. This marks the most significant currency impact that P&G has ever faced in any fiscal year. The strengthening of the US dollar has impacted Procter & Gamble worse than most of its competitors because of the sheer scale of its presence in emerging markets. The company derives over $8.8 billion sales from the aforementioned markets, which is 2 to 3 times its next biggest competitor. This has resulted in disproportionate effect of foreign exchange fluctuation on P&G’s performance. Higher Prices Impede Volume Growth In the second quarter, P&G achieved positive volume growth in only one of its business units, Fabric Care and Home Care. Volumes in the Baby, Feminine and Family Care segment were flat compared to the same period previous year, while volumes of Beauty, Hair and Personal Care, Health Care, and Grooming segments fell by 2% each. In contrast, P&G achieved pricing growth in each of its segments with the exception of Health Care, which remained flat. Pricing growth was the highest in the Grooming unit, in which higher prices contributed 4 percentage points to revenue growth. Interestingly, the Grooming business was also the worst hit by currency headwinds, which pulled down the unit’s revenues by 7 percentage points. The company resorted to higher prices to counter currency headwinds and commodity cost inflation. Further, it has stated that price upticks in the near term will be centered in the developing markets, while no such increase in prices is planned for the developed markets. However, declining volumes indicate that consumers may be shunning P&G’s products in favor of lower priced products of its competitors. This is especially true for developing markets, where the premium category products have not seen the same kind of adoption rates as in developed markets. When seen in conjunction with the sluggish economic growth in major markets like China, it is quite possible that P&G’s higher prices may result in loss of market share as consumers switch to cheaper alternatives. Cost Savings Fail to Protect Margins P&G’s gross margin fell by 40 basis points in the second quarter, while operating profit margin 80 basis points compared to the same period previous year. The decline in gross margin was led by an unfavorable geographic and product mix, followed by currency headwinds and commodity cost inflation. Selling, general and administrative (SG&A) costs as a percentage of sales also increased by 40 basis points year on year. This, along with the lower gross margin, contributed to the decline in operating profit margin. On the flip side, the company achieved substantial manufacturing cost savings during the quarter, as part of the ongoing restructuring program. SG&A costs also declined on an absolute basis, thanks to savings from efficiency and productivity efforts in marketing spending and overhead. However, P&G failed to convert these cost savings into improvement in bottom lines, due to the combination of high commodity cost inflation and currency headwinds. The company has the practice of importing its products into diverse geographic markets rather than manufacturing products locally, which inherently results in higher commodity costs. This practice includes imports into countries like Venezuela, Argentina, Russia and Japan, currencies of each of which have significantly weakened against the US dollar. This resulted in substantial currency headwinds on costs also, which puts additional pressure on the bottom line in the second quarter. To address this issue, P&G has plans to localize its manufacturing supply chain over time so that its foreign exchange exposure can be curtailed. It is currently building about 20 new manufacturing facilities in those developing markets that have caused the most significant currency headwinds. The company is also attempting to source materials locally in order to further reduce the impact of foreign exchange fluctuations. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    Lexmark Earnings:Growth In Laser Hardware And Perceptive Fillip Revenues
  • By , 1/28/15
  • tags: LXK HPQ
  • Lexmark International (NYSE:LXK) released its Q4 earnings on January 27 th, and the company posted yet another quarter of solid results as its managed printer services (MPS) and Perceptive software businesses delivered growth. The company reported 2% year-over-year growth in revenues to $1.032 billion, even as the exit from inkjet division tempered results. The revenues and earnings per share exceeded the guidance range. It’s imaging solutions and services (ISS) revenues, excluding the inkjet business, grew by 4%, buoyed by 4% growth in sales of laser hardware. Within the ISS division, managed print services (MPS) revenue grew by 16% year over year to $242 million; non-MPS revenue was flat at $633 million and inkjet revenue declined by 42% to $58 million. Additionally, Lexmark’s Perceptive software division continued to post growth as revenues grew by 37% to $99 million. See our full analysis on Lexmark Outlook For Q1 And 2015 For Q1 FY15, the company expects revenues to decline by 3% to 5% year over year and non-GAAP earnings per share to be in the $0.70 to $0.80 range. Lexmark expects revenue to decline by 3% to 5% in 2015 and Non-GAAP EPS to be in $3.60 to $3.80 range. MPS Revenues Boost Laser Printer Revenues Laser printer and cartridge division is its biggest business unit and makes up 88% of Lexmark’s estimated value. According to IDC, the worldwide hardcopy peripherals market declined in Q3. To some extent, resilience in laser hardware sales has offset the decline in total sales. This trend seems to have prevailed in Q4 as well, and Lexmark’s result indicates that it gained the most in laser printer related sales. While laser hardware revenues grew by 4% year over year to $236 million, supplies revenue grew 2% to $589 million. According to research firms such as Gartner and IDC, Lexmark is a leader in the MPS business. MPS contracts for the company have increased over the past 24 months and offset the decline in non-MPS revenues in the previous quarters. In our pre-earnings note published earlier, we had stated that we expect MPS to propel revenues. MPS was the key contributor to laser revenue growth as these revenues grew by 16% to $242 million during the quarter. Going forward, we believe that MPS integrated with Perceptive’s solutions will deliver value to Lexmark’s growing client base. Service contracts tend to be sticky, and MPS is a high margin business compared to selling hardware.  We expect it to become the biggest driver for Lexmark going forward. Perceptive Business Revenues Grow The Perceptive software division is the second biggest business unit and makes up nearly 11% of Lexmark’s estimated value. As Lexmark plans to become an end-to-end solution provider, Perceptive Software is becoming an increasingly important division for Lexmark. During Q3, revenues from this division grew by 37% to $99 million. During the quarter, clients chose to sign up for Perceptive’s evolution subscription service rather than the perpetual license, deferring recognition of the revenue from the third quarter. As a result, the company did witness excellent growth across subscription, maintenance and professional services. While the annual subscription contract value for Perceptive increased by 104% from $5 million in 2013 to $11 million in Q4 2014, licenses and maintenance revenues grew by 12% to $26 million and 55% to $38 million respectively. The annualized subscription contract value at the end of Q4 stands at $46 million, which translates into 114% year-on-year growth. The company expects the electronic content management (ECM) and business process management (BPM) segments, which serve a $10 billion dollar industry, to grow about 10% year over year. The company is targeting this segment through Perceptive software, and it continues to build Perceptive’s product portfolio through organic and inorganic means. We also expect the seamless integration of Perceptive’s array of solutions with MPS to bolster revenue for the company. We are in the process of updating our Lexmark model. At present we have a  $44.77 Trefis price estimate for Lexmark, which is 8% above its current market price. Understand How a Company’s Products Impact its Stock Price at Trefis View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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